INSURER OF MARYLAND S&LS; SAW SIGNS OF COMING CRISIS

Seventeen months before the Maryland savings and loan industry was thrust into a crisis, the corporation that insured most the S&Ls; began uncovering evidence of widespread risky investment practices by some of them, documents show.

Those documents showed that for some S&Ls; the situation was worsening through the first nine months of 1984. During that time top state regulatory officials assured legislators that the industry was in sound financial shape.

The investment practices prompted the staff of the Maryland Savings-Share Insurance Corp. to send warnings last summer to three savings and loan companies, including two based in Baltimore and now in conservatorship. The warnings, called "cease and desist" orders, demanded that they curb the number of investments in high-risk commercial real estate ventures they were making, the documents showed.

But the most serious violator, Old Court Savings and Loan in Baltimore, failed to comply with the written MSSIC orders and was later forced into conservatorship by the state.

More importantly, state regulators who have primary responsibility for policing the industry were aware of MSSIC's concerns about Old Court and the other two thrifts. The regulators did not act because they did not view the violations as threatening the financial solvency of the three institutions, said a state official.

The failure of state officials to respond more quickly to the warnings of problems at Old Court and the other institutions illustrates what critics charge was a virtual breakdown in Maryland's regulatory process, contributing to the collapse of the state's private insurance system for savings and loans. Hampered by low pay, high staff turnover, bad morale and budget cuts imposed by the state legislature, the state Division of Savings and Loan Associations found itself unable to police an industry that was exploding in growth because of deregulatory measures passed in Washington and Annapolis, according to several members of the division and industry officials.

The private insurance company and state regulators also failed to move against violators such as Old Court, in part because they viewed a major part of their job as protecting the industry from adverse publicity, according to interviews with some state officials and industry critics.

"The regulators, and I include MSSIC, saw themselves far more as protectors of the industry than as its policeman," said state Attorney General Stephen Sachs, whose office is conducting a criminal investigation into Old Court.

Sachs compared MSSIC officials and regulators with "compulsive gamblers" in dealing with problems at Old Court.

Their attitude, he said, was "one more roll of the dice, one more cut of the cards would make everything all right."

Savings and loan division officials contend they lacked authority to stem questionable practices. If a savings and loan refused to obey an order, the state divison lacked the power to impose fines or issue cease-and-desist orders -- two enforcement tools available to MSSIC, the industry's own insurer.

"All we can do is write them a letter," when serious violations are detected, said one state examiner. "In extreme cases . . . thrift officials are called in and pretty much their fingers are slapped and they are told not to do it again."